The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Feb. 19, 1997)

Last Tuesday (February 11) I addressed the ongoing discussion in the AOL Foolish Workshop message folder regarding the use of sell stops with the Growth screens we track. At the time I mentioned three prominent examples of Workshop stocks that had or might be affected by the use of sell stops. Today I want to follow up on those stocks to see from a brief distance how the stops performed.

The poster child stock which launched much of the discussion, of course, was 3COM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>. The networking stock peaked out at a closing high price of $80 1/8 on December 9, 1996. After warning about future earnings, the stock was slaughtered, losing over half its value in the next several weeks. A trailing stop loss set at 25% below the stock's highest closing price would have kicked investors out of the stock at $60 on February 4, 1997.

Since February 4, the stock continued to fall to a closing low of $37 1/4 last week. At today's close, 3Com is at $40 9/16, still more than 30% lower from the sell stop price. So for this example, at least the sell stop saved investors some $20 a share in the short run. This is in no way a suggestion that 3Com might not be a good buy here. That's another issue altogether. I'm simply looking at the possibility of adding a safety net for those of us who use strategic indexing for parts of our portfolios.

The second example was a more personal one for me since I actually owned the stock at the time and had a stop loss sale triggered. AMERICAN POWER CONVERSION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APCC)") else Response.Write("(Nasdaq: APCC)") end if %> went on a phenomenal run over the last several months, topping out at a closing price of $31 3/8 on January 10. My 25% trailing stop was triggered at $23 1/2 on January 28. But almost immediately the stock popped right back up to $28 5/8 on February 7, making it look like a horrible whipsaw.

But as I mentioned at the time, many times a stock can bounce like this and then resume its slide. And it appears that's what's happening now with American Power Conversion. At today's close, the stock traded at $20 1/8. That's roughly 14% below my stop price and more than 35% lower than the January 10 peak. We'll have to see where it goes next, but if it continues to slip while other technology stocks gain ground, the sell stop may have worked very well.

The final example I said I would watch is another stock I personally happen to own now (in the interest of full disclosure), APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %>. The stock hit a recent high closing price of $58 on January 30 after a torrid advance. The stock then began to falter, dropping to a closing low of $49 1/4 on February 11, the same day I first addressed this topic. But with a 25% trailing stop of $43 1/2, Applied Magnetics has never seriously threatened the stop point. Since February 11, the stock has reclaimed that lost ground, moving above the previous high yesterday to close at $58 3/8, and added more territory today, closing at $59. It's new stop price, then, would be $44 1/4.

Now before you put words in my mouth, this is not a wholesale endorsement of sell stops. I still struggle with this issue more than any other in my own investing. But with the mechanical strategies I follow and use, some kind of sell discipline besides the calendar rotation seems helpful and necessary to keep emotions out of the equation. Whether a 25% trailing stop or a 20% fixed stop below one's purchase price is the answer isn’t something I can answer definitively, naturally. But the more I study sell stops, the more I feel they can have a useful place in an unemotional portfolio strategy for growth stocks.

I'll continue to follow these stocks in coming weeks. On a final note, the Thoroughbred Stock Challenge entry form for March will be posted sometime tonight or tomorrow on the web site. I've recently updated the layout and modified one rule, so please check out the new look. If your old bookmarks don't get you to the site (some of the page names have changed), just use the link here to the main page, which remains the same URL.

Monthly Growth Screens
     (Jan. 3 to present)
 29.55%  Relative Strength  
 20.44%  YPEG Potential  
 13.27%  Low Price/Sales  
  8.62%  S&P 500 Index  
  6.79%  Investing for Growth  
 -5.55%  EPS Plus RS  
 -8.19%  Unemotional Growth  

Annual Value Screens
     (Jan. 1 to present)
  8.87%  Dow Jones Ind Avg  
  8.84%  Dogs of the Dow  
  6.43%  Beating the S&P  
  3.96%  Dow Combo  
  2.11%  Unemotional Value  
  2.11%  Beating the Dow  
  0.41%  Foolish Four